Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-80

1975-1 C.B. 292

Sec. 1502
Sec. 1552

IRS Headnote

Consolidated returns; change in allocating tax liability. An affiliated group that includes an insurance company will be denied permission to change its method of allocating consolidated tax liability to either the method in section 1.1552-1(a)(2) of the regulations or the combined method in section 1.1502-33(d)(2)(ii), determined for each taxable year depending on the insurance company's tax liability on a separate return basis, to comply with a directive of the insurance commissioner of the company's home state.

Full Text

Rev. Rul. 75-80

Advice has been requested whether an affiliated group's request for permission to change its method of allocating consolidated tax liability under section 1.1502-33(d)(3) of the Income Tax Regulations can be granted under the circumstances described below.

P, a holding company, is the common parent of an affiliated group that includes S a stock casualty insurance company authorized to conduct its business in the State of Z. S which is taxable under section 831 or the Internal Revenue Code of 1954, is subject to and must comply with the Insurance Code of Z and the rules promulgated by its insurance commissioner.

The insurance commissioner has determined that insurance companies that presently file consolidated returns must enter into a continuing contract with each member of the consolidated group to provide for intercompany settlements of tax liability or refund. In this regard the insurance commissioner has directed that such contract must provide that "all intercompany settlements be for an amount not to exceed that which would have been due by the insurance company had it filed a separate return or its pro-rata part of the tax paid under the consolidated return, whichever is less."

It is stated that the purpose of the insurance commissioner's directive is to provide for and insure the economic stability of insurance companies incorporated in Z.

Based on these requirements prescribed by the insurance commissioner, the affiliated group has requested permission to change its present method of allocating the tax liability among its members under section 1.1552-1(a)(2) of the regulations to a new method using either the method set forth in section 1.1552-1(a)(2) or the combination method set forth in section 1.1502-33(d)(2)(ii) depending upon the amount of S's tax liability on a separate return basis for the taxable year, so that S's portion of the tax liability will be determined as follows:

(1) For taxable years in which S would have a tax liability determined on a separate return basis that exceeded its prorata portion of the consolidated tax liability determined under the combination method under section 1.1502-33(d)(2)(ii) then the tax liability of the affiliated group will be allocated to members in accordance with section 1.1552-1(a)(2)(ii) of the regulations since such method would result in the lesser tax liability to S.

(2) For those taxable years in which S would have a tax loss determined on a separate return basis, the affiliated group will use the combination method described in section 1.1502-33(d)(2)(ii) of the regulations since under this method S would receive payments from other members for the tax savings due to S's tax loss.

For the purpose of determining the earnings and profits of each member of an affiliated group that joins in the filing of a consolidated return, the tax liability must be allocated under one of the specific methods described in section 1.1552-1 of the regulations or under a method which combines sections 1.1552-1 and 1.1502-33.

Under the provisions of section 1.1552-1 of the regulations the losses and credits of members are utilized by the group in arriving at the consolidated tax liability which is apportioned among the members in accordance with the group's elected method. Although the use of this method alone may result in some members paying less tax than they would have paid if they had filed separate returns, section 1.1552-1 does not provide for the payment of such tax savings to members contributing the losses or credits. However, if a proper election is made to use the combination method under section 1.1502-33 in conjunction with section 1.1552-1, the group may allocate additional amounts not to exceed 100 percent of the difference between the apportionment made under section 1.1552-1 and an amount computed as if the members had filed separate returns. Under this combination method, payments are required to be made to the members who contributed losses or credits.

Section 1.1502-33(d)(3) of the regulations provides, in effect, that an election once made is irrevocable and is binding upon the group for the year made and all future consolidated return years of the group unless the Commissioner of Internal Revenue authorizes a change to another method prior to the time prescribed by law for filing the return for the year in which such change is to be effective.

Since the affilated group's requested method to allocate the tax liability of the group would result in the use of different allocation methods without the consent of the Commissioner of Internal Revenue, the requirements of section 1.1502-33(d)(3) of the regulations are not satisfied. Moreover, the method proposed is not consistent from year to year.

Accordingly, the affiliated group's request for permission to change its method of allocating consolidated tax liability under section 1.1502-33(d)(3) will not be granted.